This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Billions of Dollars Paid for Underperformance

By Hal M. Bundrick

NEW YORK (MainStreet) ¿ Universities, foundations, endowments and retirement plans may be spending billions of dollars for investment advice with little, if any, return. In fact, a study by a team of Oxford University researchers says mutual fund recommendations made by investment advisors simply do not outperform other investments.

Over $13 trillion of U.S. institutional assets are advised by investment consultants at a cost of billions of dollars per year. The result? An underperformance of about 1.1% annually, compared to other investments. And that's before fees were deducted.

The academics pored over thirteen years of survey data, examining the fund selection of actively managed U.S. equity mutual funds recommended by 29 investment consultants for the period 1999-2011. As of 2011, these advisors represented a 91% share of the U.S. consulting market.

"The analysis finds no evidence that the recommendations of the investment consultant for these U.S. equity products enabled investors to outperform their benchmarks or generate alpha (excess return relative to a benchmark)," the study concludes. "This raises the question why plan sponsors engage investment consultants to help select fund managers without evidence that they add value."

Tim Jenkinson, Howard Jones, and Jose Vicente Martinez of the Saïd Business School at the University of Oxford conducted the research.

"In many cases, ultimate fiduciary responsibility for the performance of the assets rests with trustees who are non-specialists and require independent and specialist advice," the report says. "Some consultants show their 'value added' by comparing the performance of a portfolio of their recommended funds with that of an appropriate benchmark. However, they do not generally compare this performance with the performance of institutional funds which they do not recommend, nor do they make available the underlying data for scrutiny by third parties."

Since the research considered investment performance before the deduction of mutual fund and advisor fees, Jenkinson and his associates speculate that plan sponsors, foundation boards and others employ advisors for "hand holding" purposes.

"When the performance of recommended funds is shown net of such fees, their failure to add value becomes more pronounced," the researchers say. "In light of the evidence presented, what is striking is that fund sponsors follow such recommendations to the extent and at the expense that they do."

The study admits that there are other reasons to engage investment consultants, including asset/liability modeling, strategic asset allocation and to provide a 'narrative' to explain their actions to their own stakeholders. And then the researchers conclude:

"Assuming plan sponsors knew that they were not being rewarded for following consultants' recommendations, one possible reason for doing so is that plan sponsors hide behind consultants' recommendations when they have to account for their decisions."

--Written by Hal M. Bundrick for MainStreet

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,262.56 +89.32 0.55%
S&P 500 1,842.98 +12.37 0.68%
NASDAQ 4,034.1610 +11.4670 0.29%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs